Management of NPL: Causes and Remedial Measures
Consequence of NPL
Recycling Stopped
Earnings Reduced
Capital Erosion
Loan Pricing
Liquidity Problem
Credit Crunch
Reasons of NPL: External/Economy Related
Growth rate of the economy
Unemployment rate
Inflation
Interest rate
Exchange rate
Business cycle (Recession)
Asset price bubble
Directed loan
Political interference
Liberalization and Globalization
Reasons of NPL: Bank Specific
High degree of competition
Abnormal profit target
Imprudent credit policy
Wrong lending decision
Improper credit administration
Lack of reliable data/information about the industry ad the borrower
Lack of effective MIS
Delay in settling bad loan through legal system
Insider and connected party loan
Poor restructuring of loans
Lack of diversified credit portfolio
High dependence on collateral
Weaknesses in Internal Control System
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CRM Guidelines
Policy Guidelines
Lending Guidelines
Credit Assessment & Risk Grading
Approval Authority
Segregation of Duties
Internal Audit
Procedural Guidelines
Approval Process
Credit Administration
Credit Monitoring
Credit Recovery
Credit Recovery (CRM Guidelines)
The Recovery unit of CRM should directly manage accounts with sustained deterioration
Transferring accounts to the RU
A handover/downgrade checklist
Primary Functions of RU
Determine Account Action Plan/ Recovery Strategies
Pursuing all option to maximize recovery
Ensuring adequate and timely loan loss provisions
Regular review of grade 6 or worse accounts
NPL Account Management
Management of NPL must be a dynamic process.
NPL associated strategy and adequacy of provisions must be regularly reviewed.
Learning lessons from the experience of credit loss.
All NPLs should be assigned to an account manager within RU.
Maintaining the autonomy of the RU
Transferring of an NPL account to RU
Preparation of a classified loan review report
Ensuring the following things by the Recovery Unit when an account is classified as Sub
Standard or worse
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Withdrawal of facilities or demanding repayment as appropriate
Updating the CIB report
Loan loss provisions are taken based on FSV
Rescheduling of Loan as per BB guidelines and should be based on projected future cash flow
Prompt legal action if the borrower is uncooperative
NPL Monitoring
Preparation of Classified loan Review by the RU Account manager on a quarterly basis
Updating the status of the recovery plan, reviewing the adequacy of provisions and
modifying the bank’s strategy
Incentive program
Recovery as % of principal and Recommended incentive as % of net recovery amount
interest
If CG 7-8 If written off
76% to 100% 1.00% 2.00%
51% to 75% 0.50% 1.00%
20% to 50% 0.25% 0.50%
NPL Provisioning
Guidelines of BB to be followed at minimum
Banks are encouraged to adopt more stringent treatments
Provisions should be raised against the actual and expected loss
RU account manager should determine the FSV for accounts grade 6 or worse
For non-cooperative customer no value to the operating cash flow
Provisioning Requirement
Classification Status Short Term Agri. Credit All other credits
& Micro Credit
Unclassified (UC) 2.5% 0.25% for SME
1% (Except Small Enterprise &
Consumer Financing)
2% For Small Enterprise &
5% for Consumer Financing
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Substandard (SS) 5% 20%
Doubtful (DF) 5% 50%
Bad/Loss (B/L) 100% 100%
Financial Techniques
Rescheduling
Waiver/Remission of Interest
Additional Finance
Debt-Equity Swap
Write Off
Rescheduling of Loans: Guidelines
The bank must have a policy approved by its Board of Directors in place that defines the
circumstances and conditions under which a loan may be rescheduled, consistent with
this circular.
When a borrower asks for rescheduling of loan, the bank shall meticulously examine the
causes as to why the loan has become non-performing.
If a borrower while applying for rescheduling, pays the required down payment in cash at
a time, the bank must address the application within 03 (three) months upon receipt.
Banks while considering loan rescheduling, must consider overall repayment capability
of the borrower taking into account the borrower's liability position with other banks and
financial institutions.
Banks shall review the borrower's cash flow statement, audited balance sheet, income
statement and other financial statements in order to ensure whether the borrower would
be able to repay the rescheduled installments/existing liability or not.
If required, bank officers shall conduct spot inspections of the borrower's
company/business place
If a bank is satisfied after due diligence as mentioned above that the borrower will be able
to repay, the loan may be rescheduled. otherwise, bank shall take all legal steps to realize
the loan and make necessary provision.
Rescheduling of any loan must be justified in written statement by the bank's Credit
Committee. The statement must give reasons why the rescheduling is beneficial to the
long run profitability and capital adequacy of the bank, including the factors that cause
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the Credit Committee to believe that the loan will ultimately be repaid in full. The
statement must also explain the impact of this rescheduling on the bank’s liquidity
position and the needs of other customers.
Time Limit for Rescheduling: CL
Frequency SS DF B/L
First Max 18 months from the Max 12 months from Max 12 months from the
date of rescheduling the date of date of rescheduling
rescheduling
Second Max 12 months from the Max 9 months from Max 9 from the date of
date of rescheduling the date of rescheduling
rescheduling
Third Max 6 months from the Max 6 months from Max 6 months from the
date of rescheduling the date of date of rescheduling
rescheduling
Time Limit for Rescheduling: DL
Frequency SS DF B/L
First Max 12 months from the Max 9 months from the Max 9 months from the
date of rescheduling date of rescheduling date of rescheduling
Second Max 9 months from the Max 6 months from the Max 6 months from the
date of rescheduling date of rescheduling date of rescheduling
Third Max 6 months from the Max 6 months from the Max 6 months from the
date of rescheduling date of rescheduling date of rescheduling
Time Limit for Rescheduling: FTL
Frequency SS DF B/L
First Maximum 36 months Max 24 months from Max 24 months from the
from the expiry date the expiry date expiry date
Second Max 24 months from the Max 18 months from Max 18 months from the
expiry date the expiry date expiry date
Third Max 12 months from the Max 12 months from Max 12 months from the
expiry date the expiry date expiry date
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Time Limit for Rescheduling: STA and MC
First Rescheduling Repayment time limit for rescheduling should not
exceed 2 (two) years from the expiry date
Second Rescheduling Maximum 1(one) year from the expiry date
Third Rescheduling Maximum 6 months from the expiry date
Down Payment of Term Loan and STA&MC
Down payment of 15 % of the overdue or 10% of the total outstanding whichever is
lower for first time rescheduling
Down payment of 30 % of the overdue or 20% of the total outstanding whichever is
lower for second time rescheduling
Down payment of 50 % of the overdue or 30% of the total outstanding whichever is
lower for more than second time rescheduling
Rescheduling of CL/DL( Converted into TL): First Time
Overdue Amount Rate of DP
Up to Tk. 1crore 15%
Above Tk.. 1crore to 5 crore 10% (minimum 15 lakh)
Above Tk.5 crore and above 5% (minimum 50 lakh)
Rescheduling of CL/DL( Converted into TL): Second and Third Time
Second time rescheduling shall be considered upon receiving cash payment of minimum
30% of the overdue installments or 20% of the total outstanding amount of loan,
whichever is less.
Third rescheduling minimum 50% of the overdue installments or 30% of the total
outstanding amount of loan, whichever is less
New Loan facility after Rescheduling of Loans
The borrower whose credit facility has been rescheduled may avail a new loan facility
with conditions:
Payment of at least 15% of the outstanding balance
In case of borrowing from other banks, the same rule will be applicable with NOC from
the rescheduling bank
Export borrowers may be granted further credit facility (Not being a willful defaulter) , if
required, subject to settle at least 7.5 % of the compromise amount.
New Loan facility after Rescheduling of Loans
Prior approval of BB shall have to be obtained if the loan is related to the director of any
Bank Company
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Information on the loan accounts rescheduled shall be reported to the Credit Information
Bureau (CIB) of BB.
While reporting to the CIB, the rescheduled loans/advances should be shown as RS-1 for
first time rescheduling, RS-2 for second time rescheduling and RS-3 for third time
rescheduling. If rescheduling facility is availed through interest waiver, reporting should
be RSIW-1 for first time rescheduling, RSIW-2 for second time rescheduling and RSIW-
3 for third time.
Number of rescheduling should be mentioned in the sanction letter as well as in the date
column of sanction/last renewal/rescheduling in the basic CL form as RS-1/RS-2/RS-3 or
RSIW-1/RSIW-2/RSIW-3.
Restriction on Extending the Term to maturity of TL
The loan must be performing ( Unclassified: Standard or SMA )
The decision should be made at the level where the loan was originally sanctioned
The maturity date may be extended by a period of time not exceeding 25% of the current
remaining time to maturity
Write-Off
International practice to give a fair face to the balance sheet
Loans classified as ‘bad or loss’ for five years or more
Process of write off will be chronological
Cases are to be filled before write-off
‘Debt Collection Unit’
Outside agency
Written off loans to be kept in a separate ledger
To be reported to the CIB of Bangladesh Bank
Prior approval of the CB is required for writing off loans of the directors or former
directors of the banks
NPL Management: Key Issues………
Fixing the tolerance level of NPL
Knowledge management & learning from mistakes
Risk based monitoring of loan
Risk based pricing of loan
Attention on large loan
Effectiveness of early alert process
Diversification of credit portfolio
Borrower selection process
Loan structuring
Strengthening of recovery department
Using Non-legal measures
Improving credit risk management capacity